1984 (12) TMI 267 - HC - Companies Law

Nationalisation Act does not extinguish sureties' liability. Creditor can enforce claim against them. Decree modified.

The court held that the Nationalisation Act did not extinguish the obligations of the principal debtor or the sureties. The liability of the sureties ... Powers of Central Government to assume management or control of an industrial undertaking in certain cases Issues Involved:1. Liability of the sureties post-nationalisation.2. Effect of the Nationalisation Act on the principal debtor's liability.3. Rights and remedies of the creditor under the Nationalisation Act.4. The impact of the dismissal of the suit against the principal debtor on the sureties.Detailed Analysis:1. Liability of the Sureties Post-Nationalisation:The court examined whether the liability of the sureties (defendants Nos. 2 and 3) was extinguished by the Nationalisation Act. It was argued that the sureties' liability, being accessory or secondary, should be extinguished if the principal debtor's liability was extinguished. However, the court held that the Nationalisation Act did not extinguish the obligations of the principal debtor or the sureties. The court noted that the liability of the sureties remains unaffected if the creditor reserves remedies against them, even if the principal debtor is released.2. Effect of the Nationalisation Act on the Principal Debtor's Liability:The court discussed the provisions of the Nationalisation Act, which resulted in the transfer of the undertaking and its assets to the Central Government and subsequently to the National Textile Corporation. The Act provided for the discharge of the owner's liability only to the extent of the admitted claims under the Act. The court concluded that the Nationalisation Act did not extinguish the entire liability of the principal debtor but only discharged it to the extent of the compensation awarded and claims admitted under the Act.3. Rights and Remedies of the Creditor Under the Nationalisation Act:The court analyzed the creditor's rights under the Nationalisation Act, particularly the provisions for filing claims and the priority of claims. The court emphasized that the creditor's remedy under the Act is without prejudice to the contractual rights and obligations of the parties. The creditor is entitled to file a claim before the Commissioner and receive payment from the compensation awarded to the owner. However, for any balance amount not covered by the compensation, the creditor retains the right to proceed against the principal debtor and the sureties.4. Impact of the Dismissal of the Suit Against the Principal Debtor on the Sureties:The court addressed the appellant's contention that the dismissal of the suit against the principal debtor constituted res judicata and exonerated the sureties. The court clarified that the dismissal was based on the availability of an alternative remedy under the Nationalisation Act and not on the merits of the claim. Therefore, the dismissal did not bar the creditor from enforcing its claim against the sureties. The court also noted that mere forbearance to sue the principal debtor does not discharge the sureties unless there is an express stipulation in the guarantee to that effect.Conclusion:The court concluded that the liability of the sureties remains intact despite the nationalisation of the principal debtor's undertaking. The creditor retains the right to enforce the claim against the sureties for any balance amount not covered by the compensation awarded under the Nationalisation Act. The decree was modified to ensure that any amount realized by the creditor under the Nationalisation Act would be credited to the sureties, and the execution of the decree was postponed until the final disposal of the creditor's claim under the Act. The appeal was dismissed with no order as to costs.